In little more than two decades since the first commercial
banks sprang up in the early 1990s, the banking sector in
Mongolia has undergone repeated periods of rapid expansion
followed by consolidation.

Five years ago there were 16 banks. Three failures, two of
them in an eight-week period in 2009, one new bank and three
mergers later the sector has shrunk by a fifth to its smallest
size since the turn of the century.

Even with the 13 banks that remain today, the sector remains
highly concentrated with the top five – TDB, Khan
Bank, Golomt Bank, XacBank and State Bank – accounting
for 90% of all assets within the system.

Analysts have long believed that the sector is overcrowded
and that half a dozen banks would be better suited to serve a
small market of 2.9 million people. Further possible
consolidation could take the form of a merger of two of the
systemically important banks or one or more of the eight
smaller niche banks relinquishing their licences or being taken
over by the dominant players.

"Consolidation would make sense and we’re
seeing something similar in other countries. But our experience
has been that consolidation only happens when people are really
desperate," says Clemente Cappello, founder and CEO of Sturgeon
Capital. "It’s not necessarily a rational process
but rather consolidation happens when banks are being bailed
out, or a foreign bank comes in and effectively is buying the
franchise and the licence rather than the actual financial
value of the company.

"There’s a point at which if you put
together two banks each with 25% or 30% market share
you get a bank with 50% plus and that starts to look a
bit too controlling of the market"

Randolph Koppa, TDB

"I don’t see that happening in Mongolia and I
think they should be very careful about inviting in large
foreign banks. A Chinese bank takeover and rebranding of a
domestic bank would introduce unfair competition that I
don’t think the central bank is going to allow to
happen."

TDB president Randolph Koppa, argues the threat from foreign
banks is overstated, but for different reasons. "Foreign banks
are seen as a chance to get cheaper money into the country and
have lower priced loans but there isn’t a big
local domestic pool of funds they can tap. Without a proper
local money market or a big consumer base to get retail
deposits any foreign bank that gets a licence for banking
operations, either in subsidiaries or branches, would probably
have to fund into Mongolia from abroad.

"That’s no different to the representative
offices they currently have but as cross-border lenders they
don’t have the considerable added costs of running
a bank in the country and all that entails both from local
requirements and from headquarters – compliance
officers, IT support and controls on money transfers."

Privatization plan

Koppa believes that there is further potential consolidation
among the big five to come because the central
bank’s ultimate goal is to privatize State Bank;
one of the other four, or a foreign bank, could be the
acquirer. "Beyond that I’m not sure how much more
of a gain could be made in terms of competitiveness because
there’s a point at which if you put together two
banks each with 25% or 30% market share you get a bank with 50%
plus and that starts to look a bit too controlling of the
market."

In a wave of consolidation starting in October 2009, Savings
Bank took over Mongol Post Bank, doubling its assets to become
one of the country’s largest banks. A month later,
Bank of Mongolia (BOM) placed into receivership a further two
troubled banks, Anod – which it had taken over the
previous December – and the MSE-listed Zoos. Anod, the
fifth largest lender, was dissolved and all its accounts were
transferred into Savings Bank. A wholly government-owned bank,
State Bank, was then set up to hold the good assets and
accounts of Zoos Bank.

Last July, weighed down by bad loans to affiliates and
losses from the Mongol Post merger, Savings Bank was itself
declared insolvent and taken over by BOM. Its assets of around
$600 million, 1.7 million accounts, 500 branches and around
3,000 staff were transferred to State Bank, transforming it
into one of the largest lenders.

"State Bank was merged with Savings Bank due to Savings
Bank’s failure to meet the BOM’s
prudential requirements and its passive operations exceeding
its active operations," says Gombosuren Khandtsooj, State
Bank’s director of investment banking. "At that
time State Bank was a small commercial, state-owned bank. After
the merger it is much larger, ranking fifth in terms of
activity, and the largest by number of branches.

"Personally, I assume that a lesser number of larger banks
is more important for the future of the Mongolian banking
sector. However, it also depends on the stage of Mongolian
development. The 'too big to fail’ phenomenon can
happen anywhere.

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